CORPORATES
CREDIT OPINION Telenor ASA 21 July 2021 Update following outlook change to negative
Update Summary Telenor ASA's (Telenor) A3 rating reflects its position as the incumbent integrated telecom operator in Norway (Aaa stable) with a presence across Scandinavia; its leading mobile telephony operations in Asia; the growth prospects in Asia because of increasing demand for data, and the good momentum in Norway and Finland supported by the upselling of 5G and RATINGS fibre services, which has more than offset the decline in legacy copper services; and its strong Telenor ASA underlying cash flow generation (pre-dividends). Domicile Oslo, Norway Long Term Rating A3 Telenor's rating also reflects its exposure to emerging market volatility; intense competition Type Senior Unsecured - Fgn across its markets, including in Sweden and Denmark, which have experienced a prolonged Curr period of revenue decline; the group’s complex ownership structure, with certain subsidiaries Outlook Negative fully consolidated but not fully owned; the increase in its Moody's-adjusted gross leverage, Please see the ratings section at the end of this report which we expect to be around 3.0x in 2021 and 2022, compared with 2.7x in 2019 pro forma for more information. The ratings and outlook shown for the acquisition of DNA in Finland; the negative impact of the coronavirus pandemic and the reflect information as of the publication date. expected deconsolidation of operations in Myanmar and Malaysia; and a degree of structural subordination for Telenor's debt because of the substantial third-party debt raised at the subsidiary level. Contacts Sebastien Cieniewski +44.20.7772.1964 Telenor qualifies as a government-related issuer (GRI) because it is 54% government VP-Sr Credit Officer owned. The A3 rating benefits from a one-notch uplift because of the implicit government [email protected] support. The rating also reflects the combination of the following GRI inputs: a Baseline Joao De Almeida +44.20.7772.1393 Credit Assessment (BCA) of baa1; the Aaa (stable) local-currency rating of the Norwegian Associate Analyst government; the low default dependence between Telenor and the government; and the low [email protected] expectation of support from the government. Mario Santangelo +971.4237.9533 Associate Managing Director Exhibit 1 [email protected] Telenor's Moody's-adjusted gross leverage will remain outside the trigger set for the A3 rating at least for the next 18-24 months Evolution of Moody's-adjusted gross debt/EBITDA between 2016 and 2023E
Debt / EBITDA Trigger Up Trigger Down Debt / EBITDA (including Celcom Digi dividends) 3.50x
3.25x
3.00x
2.75x
2.50x
2.25x
2.00x
1.75x
1.50x 2016 2017 2018 2019 2020 2021E 2022E 2023E Leverage in 2019 is pro forma the consolidation of DNA. Leverage for 2021E to 2023E is based on our projections. Source: Moody's Investors Service MOODY'S INVESTORS SERVICE CORPORATES
Credit strengths » Broad geographical diversification
» Leading positions in most of its markets
» Good progress in delivering cost-efficiency measures, which supports its higher-than-peer EBITDA margin
» Publicly stated financial policy to maintain net debt/EBITDA (as reported by the company) within the target range of 1.8x-2.3x (post-IFRS 16)
» Favourable structural trends in Asia, driven by increasing smartphone penetration and data usage, despite the relatively high short- term impact of the pandemic
Credit challenges » High exposure to emerging market volatility
» Intense competition in most markets
» Spectrum payment needs outside the Nordic region
» Leverage likely to increase over the next two years based on our projections from an already high level for the rating category
» Structural subordination for Telenor's holding company debt
Rating outlook The negative rating outlook reflects our expectation that Telenor’s metrics will remain outside of the updated leverage and cash flow target ranges in 2021 and 2022 with potential improvement from 2023 as the company returns to more significant EBITDA growth. However, the pace of this improvement remains uncertain and will partly depend on the phasing off of the impact of the pandemic and the future financial policy of the group, including its M&A strategy. Factors that could lead to an upgrade We would consider upgrading Telenor's rating if the group's credit metrics improve such that its Moody's adjusted retained cash flow (RCF)/debt increases towards 30% on a sustained basis, and Moody's-adjusted debt/EBITDA falls consistently and comfortably below 2.25x. In addition to the factors listed above that affect the company's BCA, the rating could be affected by changes in the rating of the supporting government or changes in our assessment of default dependence and government support. Factors that could lead to a downgrade Negative rating pressure could develop if Telenor's Moody's-adjusted RCF/debt remains well below 20% for a prolonged period; its Moody's-adjusted debt/EBITDA remains above 2.75x, or the company were to adopt a more aggressive financial policy that would lead to sustained negative free cash flow (FCF).
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
2 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Key indicators
Exhibit 2 Telenor ASA NOK Millions Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-21 (LTM) Proj 2021 Proj 2022 Revenue 128,175 125,395 112,069 105,923 113,666 122,811 120,731 110,009 98,435 Debt / EBITDA 2.0x 2.2x 1.9x 2.0x 2.8x 2.8x 2.7x 3.0x 3.1x RCF / Debt 24.5% 26.4% 31.7% 29.7% 13.2% 18.3% 18.5% 17.3% 16.8% (EBITDA - CAPEX) / Interest Expense 8.0x 7.1x 8.4x 7.7x 5.2x 7.4x 7.5x 7.0x 6.9x All figures and ratios are calculated using our estimates and standard adjustments. Periods are financial year end unless indicated. LTM = Last 12 months. The Projections (Proj) are our opinion and do not represent the views of the issuer. Proj 2021 is pro forma for the reclassification of Myanmar operations as assets held for sale while Proj 2022 is also pro forma for the deconsolidation of operations in Malaysia. Pro forma for dividends to be received from Celcom Digi we project Moody's adjusted debt/EBITDA at 3.0x in Proj 2022. Source: Moody's Investors Service
Profile Telenor ASA (Telenor) is the incumbent integrated telecommunications provider in Norway. The company delivers a full range of services and products, including mobile and fixed-line telephony, broadband and data services for residential and business customers, and a broad range of wholesale services. In addition, the company is one of the leading international providers of mobile services, with around 182 million mobile subscribers worldwide as of December 2020. The company's activities outside its home market include mobile and fixed operations in Sweden and Denmark, and mobile operations in Thailand (dtac), Malaysia (Digi), Bangladesh, Pakistan, Myanmar and Finland. Telenor is also a leading provider of television and broadcasting services in the Nordic region. The company is majority owned by the Norwegian government, which holds a 54% stake in the company. Recent developments On 8 July 2021, Telenor announced that it had entered into an agreement to sell 100% of its mobile operations in Myanmar to M1 Group for $105 million (around NOK900 million), of which $55 million (around NOK470 million) is deferred over five years. The company's decision was driven by the deterioration of the economic and political situation in the country as well as increasing constraints imposed on telecom operators. On 4 May 2021, Telenor announced that it had fully written off its Myanmar operations following the military coup in the country on 1 February 2021, which worsened the economic and business environment outlook in the country with no prospects of improvement. Myanmar’s authorities have repeatedly blocked internet access, with mobile data access restricted across much of the country since 15 March 2021, significantly hurting Telenor's results. The company generated NOK7.1 billion of total revenue and NOK4.2 billion of EBITDA (as reported by the company) in Myanmar, or 6% and 7% of total group revenue and EBITDA in 2020, respectively.
On 21 June 2021, Axiata Group Berhad (Axiata, Baa2 stable) and Telenor announced that they had signed an agreement regarding the proposed merger of the Malaysian mobile operations, Celcom Axiata Berhad and Digi (49% owned by Telenor). Axiata and Telenor will be equal partners with each having a 33.1% ownership stake in the merged entity, which will assume Digi’s listing on Bursa Malaysia. At completion, the merger of Celcom and Digi will result in Axiata receiving newly issued shares of Digi representing 33.1% of the enlarged issued share capital of Digi, and cash of around $470 million, of which $400 million will come from Digi as debt in the merged entity and around $70 million from Telenor as part of an ownership equalisation under the terms of the merger. The completion of the transaction, expected by the second quarter of 2022, will be subject to the approval of both Axiata and Digi shareholders, regulatory approvals, and other customary terms and conditions.
3 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Exhibit 3 Exhibit 4 Norway and Thailand are the largest contributors to Telenor's Pro forma for the disposal of Myanmar and the deconsolidation of revenue Malaysia, Telenor's Scandinavian operations accounted for more Revenue breakdown by geography for 2020 than 50% of revenues in 2020 Pro forma revenue breakdown by geography in 2020 (pro forma for disposal of Myanmar and deconsolidation of Digi in Malaysia)
Denmark Denmark Myanmar 5% Pakistan Norway 4% 5% Pakistan Norway 6% 21% 5% 25% Other units 7% Other units 6% DNA - Finland 9% DNA - Finland 8%
dtac - Thailand 18% Sweden Sweden dtac - Thailand 12% 10% 22%
Grameenphone - Grameenphone - DiGi - Malaysia Bangladesh Bangladesh 11% 14% 12% Before eliminations. Before eliminations. Source: Company reports Source: Company reports
Detailed credit considerations Despite its moderate scale, Telenor has high geographical diversification While Telenor’s scale is moderate with revenue of NOK123 billion in 2020 (or NOK116 billion pro forma for the disposal of Telenor Myanmar), the company has above-average geographical diversification compared with that of its telecom peers.
Telenor is the incumbent telecom operator in Norway with a 55% revenue market share in the mobile segment and 2.8 million subscriptions as of year-end 2020. However, Telenor’s operations in its domestic market only accounted for 21% of total revenue (before eliminations) in 2020 (23% pro forma for the disposal of Telenor Myanmar). This relatively low proportion of domestic revenue reflects the company’s high geographical diversification.
In addition to Norway, the company has operations in other Nordic countries, including Sweden and Denmark, and the company recently entered Finland with the closing of the acquisition of DNA in 2019. We positively view Telenor’s expansion into Finland because this gives the company exposure to a growing mobile market that complements its existing operations in the Nordic region.
The company has also expanded into Asia. Telenor splits its operations in the region between developed Asia (31% of 2020 total revenue), including Malaysia and Thailand, and emerging Asia (23%), including Bangladesh and Pakistan. With the exit from Myanmar, Telenor's proportion of revenue generated from the Nordics and developed Asia will increase. To enhance governance, Telenor established two hubs in Norway and Singapore in 2020 to oversee its operations in the Nordics and Asia, respectively. While expansion into Asia has historically provided Telenor with exposure to higher-growth markets relative to the more mature Nordic region, it has also brought increased revenue and earnings volatility, including from the appreciation and depreciation of the local currencies versus the Norwegian krone, Telenor group’s reporting currency. Thus, the disposal of Telenor Myanmar is likely to contribute to increasing the proportion of revenue generated from the Nordics and developed Asia, and potentially contribute to reducing the revenue and earnings volatility of the group.
Telenor is the largest or second-largest mobile operator in all the countries in the Nordics and Asia where it operates, except for Thailand and Finland where it ranks number three.
4 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Exhibit 5 Exhibit 6 Telenor has a dominant position in its domestic mobile market Telenor has a dominant position in its domestic fixed-broadband Norwegian mobile market share based on subscribers market Norwegian fixed-broadband market share based on subscribers
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Telenor Telenor
Telia Altibox
Ice Telia
Fjordkraft NextGenTel
Lycamobile Global Connect
Chili mobil Tafjord Marked
Other Other
Data as of H1 2020. Source: Norwegian Communications Authority Data as of H1 2020. Source: Norwegian Communications Authority
Higher negative impact of the pandemic on Telenor’s Asian operations than in the Nordics; timing of recovery in Asia remains uncertain Although the telecom sector has been resilient to the pandemic compared with other sectors, it has not been fully immune to the shock created by it. Telenor experienced a 2.3% decline in total organic revenue and a 1.9% decline in organic subscription and traffic revenue in 2020 compared with the year earlier. Subscription and traffic revenue further declined by 4.0% in Q1 2021 compared with the year earlier (or -2.9% excluding Myanmar, which has been suffering from restrictions on mobile internet usage from March 2021). Subscription and traffic revenue returned to a 2% organic growth in Q2 2021.
Telenor’s performance in 2020 was uneven though, with stronger resilience in the Nordic region than in Asia. The company continued to experience year-over-year subscription and traffic revenue growth in its domestic Norwegian market at 2% in 2020, an acceleration compared with 2019 when these revenue increased by only 1% year over year. This performance is remarkable in a market that we consider mature and demonstrates management’s ability to cross-sell value-added services to its customers, which mainly refer to security and insurance services, and account for around two-thirds of the mobile average revenue per user growth (ARPU) in the country. Other drivers for growth in Norway include the successful penetration of fibre-to-the-home (FTTH) and fixed wireless access (FWA) services that are being adopted by a large percentage of existing customers, who are switching from copper. In Q1 2021, organic subscription and traffic revenue in Norway recorded a moderate decline of 0.9% as the acceleration in the switch from copper and weak roaming more than offset the growth in fibre, FWA and 5G but then stabilised in Q2 2021. In Finland, the continued quarter-on- quarter subscription and traffic revenue growth in 2020 has been driven mainly by the solid momentum in the upselling of 5G services to its existing customer base at a premium to 4G services. This strong performance in Norway and Finland has more than offset the prolonged decline in the highly competitive Swedish and Danish markets where ARPU continued to decline by 11% and 3% on a year- on-year basis in Q4 2020, respectively. However, these two markets have been improving. Subscription and traffic revenue in Sweden stabilised during Q2 2021 while Denmark experienced its second consecutive quarter of subscription and traffic revenue growth in Q2 2021 after a long period of decline.
After strong subscription and traffic revenue growth in January and February of 2020, performance in both developed Asia and emerging Asia was strained for the rest of the year. The decline was most pronounced in developed Asia, including Thailand and Malaysia, where fewer tourists and migrant workers arrived because of pandemic-related travel restrictions, contributing to the year- on-year decline in Telenor’s subscriber base to 182 million as of year-end 2020 from 186 million as of year-end 2019. The temporary lockdown of physical retail channels hurt sales, especially in Asian prepaid markets. There have been new waves of COVID-19 infections in Q4 2020 in several markets, including in Myanmar and Pakistan, while the number of daily new COVID-19 cases in Bangladesh
5 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
has been stable. In Thailand and Malaysia, the number of daily new cases continued to increase into 2021. To face the new waves of infections, many countries in Asia have reinstated local lockdowns.
Based on the high level of uncertainty and the significant disruption caused by the pandemic, particularly in the first half of the year, Telenor expects organic subscription and traffic revenue to grow at between 0% to 1% in 2021. Q1 2021 was the last quarter when the company faced a year-on-year decline in roaming revenue because of the pandemic and Q2 2021 experienced a positive subscription and traffic revenue growth supported by strong momentum in Finland and Denmark, and a strong revenue development in Bangladesh and Pakistan from data and subscription growth. At the same time subscription and traffic revenue growth benefitted from a stabilisation in Sweden, Thailand and Malaysia in Q2 2021. On a reported basis, we expect total revenue to decline by up to 5% based on our assumption that the Norwegian krone will stabilise although at a higher level than the 2020 average against most of the currencies in the Nordic and Asian countries where it operates. Beyond 2021, we project Telenor to return to more robust revenue growth of around 2% per year, supported by its continued strong performance in Norway and Finland, less negative trends in Sweden and Denmark, and recovery in Asia, including a recovery in roaming revenue. Asia will benefit from positive structural trends, including increasing demand for data as smartphone penetration continues to grow. In 2020, data revenue grew by 5% in Bangladesh and 30% in Pakistan.
Exhibit 7 Higher negative impact from COVID-19 on Asian operations relative to Scandinavia in 2020 Organic subscriber and traffic revenue growth by region (Q1 2020-Q2 2021)
Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20% Norway Sweden Denmark Finland Thailand Malaysia Bangladesh Pakistan Myanmar No quarterly statistics were available for Finland in Q1 2020 and Q2 2020 and for Myanmar in Q2 2021. Source: Company reports
Strong track record in delivering cost efficiencies have enabled Telenor to deliver strong EBITDA growth Telenor has maintained an ambitious cost-saving programme that aims to reduce operating expenses by 1%-3% yearly between 2020 and 2022; this follows a similar plan implemented for 2018-20. Improved cost efficiency will come from workforce reductions, as the company shifts its customer service to digital channels; lower marketing and sales spending; optimisation of tower and infrastructure operations; and lower operating spending from network and IT modernisation, including copper decommissioning in Norway. Management estimates that such initiatives will generate NOK3 billion-NOK4 billion of gross savings across the projected period.
Telenor has demonstrated its ability to deliver on its cost-saving programme, having reduced operating expenses by a significant 6% in 2020 (excluding DNA and adjusted for foreign exchange), of which around 60% was driven by structural initiatives (equivalent to around NOK1.5 billion of operating expense savings realised in 2020). The remaining cost reductions realised in 2020 were mainly temporary savings related to the pandemic, including travel costs, sales and marketing costs. Previously, Telenor had already reduced its costs by 3% and 1% in 2018 and 2019, respectively.
The good progress in delivering cost savings contributed to Telenor generating 2% organic EBITDA growth in 2020 despite the above- mentioned strain on total organic revenue, organic subscription and traffic revenue during the year. Reported EBITDA before other income and other expenses increased by 11% in 2020 compared with the year earlier because of the full-year consolidation of DNA and positive foreign-exchange movements. The strain on revenue in certain countries in 2020 directly translated into an EBITDA decline, including in Thailand (1% year-on-year decline in organic EBITDA in 2020), Denmark (1%), Sweden (6%) and Malaysia (6%).
6 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
However, this decline was more than offset by EBITDA growth in Norway (4%), Finland (8%) and Myanmar (12%). The company's Myanmar business recorded strong performance in the first nine months of 2020 driven by revenue growth and cost savings before declining in Q4 2020, hurt by a 7% decrease in subscription and traffic revenue during the quarter as a result of a decline in prices and the number of customers following the implementation of a SIM registration process. In Q1 2021, the relatively large decline in revenue, partly driven by the company's performance in Myanmar, was not fully offset by the year-over-year reduction in operating expenses of 7%, and resulted in an organic EBITDA decline of 2% during the quarter. However EBITDA returned to a 4% organic revenue growth in Q2 2021 supported mainly by the stronger subscription and traffic revenue trend and a 1% reduction in operating expenses during the quarter.
In line with the flat to modest organic subscription and traffic revenue projected by management over 2021, Telenor forecasts organic EBITDA to grow by 0% to 2% during the year (pro forma for the disposal of the Myanmar business, which has experienced higher profitability than the group) as the continued realisation of cost savings will be partly offset by additional costs driven by the recovery in activity, particularly in Asia, during H2 2021. Assuming such a recovery takes place, Telenor will likely increase spending on certain cost items, including sales and marketing, which were subdued in 2020. Beyond 2021, the revenue recovery and continued focus on cost efficiencies are likely to drive solid growth in EBITDA in line with the growth in revenue.
Exhibit 8 Telenor's cost-saving programme drives EBITDA margin expansion EBITDA (before other income and other expenses) margin evolution
50% 48.6%
48% 46.4% 45.5% 45.6% 45.7% 45.6% 46% 45.1% 44.8% 45.1%
43.8% 43.7% 45.5% 44% 42.9% 42.4% 42.2% 41.7% 42% 41.0%
40%
37.7% 37.4% 38% 38.1%
36%
34% Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Next 12-18 months
Margins in 2019 are pro forma the consolidation of DNA for 2019. Q2 2021 data excludes Myanmar. Next 12-18 months reflects our projections excluding Myanmar. Source: Company reports
Increasing competition in Asia in particular may lead to consolidation in the region Asian markets where Telenor operates have experienced greater competition over the last two years, which is reflected in the strain on ARPU or subscriber losses.
The merger of Telenor's and Axiata's operations in Malaysia will marginally weaken Telenor's credit profile because the company's stake in the combined group will be diluted to 33.1% compared with its current 49% ownership of Digi on a standalone basis. Thus, Telenor's Malaysian operations will be deconsolidated as Digi-Celcom and will be treated as an associate entity. At the same time, the deconsolidation of Digi will lead to a modest increase in Telenor's leverage. However, the transaction reflects the increased focus on consolidation in the region. The reduction in the number of mobile network operators as a result of the merger of Digi and Celcom may alleviate the competitive pressure that has been increasing in the country, which has partly been driven by new entrants. In addition, the increased scale and capacity to innovate will allow Celcom-Digi to mitigate the negative impact from the Malaysian government's aim to deploy 5G infrastructure across the country through a state-owned special-purpose vehicle, Digital Nasional Berhad. We expect such an initiative to increase competition in the mobile market as mobile operators will solely compete on services and not infrastructure, which will be shared by all operators.
We expect Telenor to execute deals in the medium term because the company has publicly stated its intention to participate in the consolidation of the telecom industry in Asia.
7 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Telenor may also consider consolidation in the Nordics, including in Denmark, where there are currently four mobile network operators. Telenor and Telia Company AB (Baa1 stable) failed to consolidate their operations in the country in 2015.
We expect Telenor's Moody's-adjusted gross leverage to increase over the next two years from an already high level in 2020 Telenor's Moody's-adjusted gross leverage was 2.7x for 12 months that ended Q1 2021, slightly below 2.8x as of year-end 2020. We expect an increase in the company’s adjusted gross leverage to around 3.0x in 2021 and 2022. The increase in leverage in 2021 will be driven by the negative impact on EBITDA from the appreciation of the Norwegian krone and the classification of the company’s operations in Myanmar as assets held for sale.
Despite the likely moderate recovery in EBITDA in 2022, we expect a further negative effect on leverage because of the deconsolidation of Digi, its 49%-owned fully consolidated operations in Malaysia, following the expected closing of the merger with Celcom Axiata Bhd (a subsidiary of Axiata) in Q2 2022. The deconsolidation of both Telenor’s Myanmar and Malaysian operations will have a negative effect on the company’s Moody’s-adjusted gross leverage of around 0.3x (or 0.2x including dividends to be received from Celcom Digi, as estimated by us) because of the subsidiaries’ relatively low leverage compared with the group average. For example, the Malaysian operations accounted for only around 8% of Telenor's consolidated debt (including lease and spectrum licence liabilities) and 13% of group EBITDA in 2020.
Exhibit 9 Disposal of Telenor Myanmar and deconsolidation of Digi in Malaysia have a moderately negative impact on group leverage Pro forma impact on leverage of the deconsolidation of Telenor Myanmar and Digi from Telenor's accounts (FY 2020) FY2020 Moody's Àdjusted EBITDA 54,223 Digi reported EBITDA 6,938 Myanmar reported EBITDA 4,055 Moody's Adjusted EBITDA (exc. Digi and Myanmar) 43,230
Moody's Adjusted Debt 153,553 Digi reported Debt (incl. capitalised leases) 11,606 Myanmar reported Debt (inc. capitalised leases) 5,587 Moody's Adjusted Debt (exc. Digi and Myanmar) 136,360
Moody's Adjusted Debt/EBITDA 2.83x Moody's Adjusted Debt/EBITDA (exc. Digi) 3.00x Moody's Adjusted Debt/EBITDA (exc. Myanmar) 2.95x Debt/EBITDA (exc. Digi and Myanmar) 3.15x
Digi and Myanmar's EBITDA as provided in the company's annual accounts. Debt includes capitalised leases. Source: Company reports and Moody's Investors Service
Previously, Telenor's Moody's-adjusted gross leverage ratio had increased significantly to 2.7x in 2019 (pro forma for the acquisition of DNA) from 2.0x a year earlier, mainly because of the debt-funded acquisition of DNA and the implementation of IFRS 16. The application of the new accounting standard resulted in a 0.2x increase in its Moody's-adjusted gross leverage as lease liabilities under IFRS 16 were higher than capitalised leases under our operating lease adjustment based on IAS 17 disclosure. Net debt/EBITDA, as reported by the company, was 1.8x as of 31 March 2021 — towards the lower end of Telenor's revised target range. To reflect the impact of IFRS 16 on its metrics, Telenor revised its target net leverage range in 2019 to 1.8x-2.3x from 1.5x-2.0x previously.
The change of outlook to negative from stable on Telenor's ratings in July 2021 reflects the fact that we expect metrics to remain outside of the triggers set for the A3 rating over the next 18 months. Therefore, Telenor's rating will remain weakly positioned during this period. Similarly, Telenor's adjusted RCF/debt remained weak at 18% in 2020 — below the trigger set for the A3 rating at above 20% — and is projected to be around 17% in both 2021 and 2022.
Despite the deterioration in credit metrics since 2019, Telenor has historically followed a balanced financial policy between shareholders and creditors. The group's capital allocation priorities have been to maintain a solid balance sheet and aim for annual
8 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
growth in dividend per share. The company has announced its intention to pay a dividend of NOK9 per share for 2019 (NOK12.6 billion), to be paid in two tranches in June 2021 and October 2021. This represents a 3% increase in ordinary dividend per share compared with the year earlier (NOK12.4 billion payout in 2019). However, the fact that Telenor has not announced any new share buyback programme for 2021 is a positive.
Lower capital spending intensity to support cash flow Telenor's reported capital spending, excluding leases, licences and spectrum, amounted to NOK16.4 billion in 2020, a NOK1.0 billion decrease from the year earlier. Capital spending in 2020 was mainly driven by network modernisation in several markets, including the fibre and 5G rollout in Norway, the 5G rollout in Finland, and network capacity and coverage expansion in Thailand. Capital spending for spectrum and licences amounted to NOK5.1 billion in 2020 and was primarily in Thailand, Denmark and Finland. Capital spending as a proportion of revenue, excluding licences and spectrum, was 13% in 2020 compared with 15% in the year earlier because of lower investments in its Asian subsidiaries, as well as high comparables in Thailand in 2019 and import restrictions in Bangladesh at the beginning of the year.
Telenor now projects capital spending as a percentage of revenue to increase to 15%-16% in 2021 (excluding Myanmar), in line with its medium-term guidance of 15% average annual spend for 2020-22. This reflects continued strong investment in Norway's fibre and 5G networks. Telenor has started modernising its network in Norway to migrate all customers on its copper network by 2023. Capital spending will also support the strong growth in data usage from a relatively low level across its Asian operations.
In Thailand, at the spectrum auction in February 2020, dtac decided not to participate in the 2.6 gigahertz (GHz) bidding and only acquired 200 megahertz of 26 GHz spectra because dtac could get the 3.5 GHz spectra (currently in use by Thaicom) on better terms. The company faces risks related to the uncertainty surrounding the timing of the 3.5 GHz auction, and this will result in increased competition for dtac because its competitors are starting to offer 5G services.
Based on our EBITDA, capital spending and dividend assumptions, we project Telenor will generate Moody's-adjusted FCF (after dividends and leases) of around NOK3 billion per year over the next two years, representing FCF/Moody's-adjusted debt of 2% per year.
Exhibit 10 Capital spending is likely to bounce back in 2021 and 2022, in line with the 2020-22 plan Capital spending (excluding spectrum, in NOK millions), and capital spending/sales evolution, 2018-22E
Capex excluding spectrum (LHS) Capex / Revenue (RHS) 19,000 15.8% 16.0%
18,000 15.5% 15.0% 15.0% 17,000 14.5% 16,000 14.0% 15,000 13.3%
NOK millionsNOK 13.5% 14,000 13.0%
13,000 12.5%
12,000 12.0% 2018 2019 2020 2021E 2022E
Data for 2019 is pro forma the consolidation of DNA for 2019. 2021E is pro forma for the reclassification of Myanmar operations as assets held for sale while 2022E is also pro forma for the deconsolidation of operations in Malaysia. Source: Company reports
ESG considerations From a corporate governance perspective, Telenor is a public company, majority-owned by the Kingdom of Norway. We take into consideration the fact that Telenor has a clearly defined financial policy, including a target leverage ratio.
Social considerations were a key driver for the change of outlook to negative from stable in July 2021. While we positively view Telenor’s exposure to a growing population and relatively underpenetrated markets for mobile data consumption through its presence
9 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
in developed and emerging Asian countries, the change of outlook was partly driven by political unrest in Myanmar. Following the military coup in Myanmar, the authorities ordered a nationwide mobile data network shutdown from 15 March 2021. This order, alongside the worsening economic and business environment, had a negative impact on Telenor's financial results and eventually led to the company deciding to completely write off its Myanmar operations and sell the business.
In terms of environmental and social risks, Telenor’s exposure is in line with that of the overall industry. While telecom operators have low direct business exposure to environmental risks, data security and data privacy issues are prominent in the sector. Liquidity analysis Telenor benefits from its good liquidity position. As of 30 June 2021, the company had NOK19.7 billion in cash and cash equivalents as well as full availability under its €2.0 billion committed revolving credit facility maturing in April 2024, with options for extension until April 2025 on certain terms. Additionally, despite the large dividend distributions, we project that Telenor will continue to generate positive FCF.
Exhibit 11 Telenor's debt maturity profile over the next 12-18 months is well covered by its existing liquidity sources Debt maturity profile as of 30 June 2021 Subsidiaries Telenor ASA 60
50
40
30 45.7 NOK billionsNOK 20
10 10.6 6.6 2.8 5.1 5.1 7.4 4.4 3.8 4.7 0 1.4 3.1 2021 2022 2023 2024 2025 2026 and Beyond Source: Company reports
10 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Methodology and scorecard The following table shows Telenor's scorecard-indicated outcome using our Telecommunications Service Providers rating methodology, with data as of 31 March 2021, and on a forward-looking basis. The assigned rating is one notch above the scorecard-indicated outcome, reflecting the one-notch uplift for potential government support for the baa1 BCA.
Exhibit 12 Rating Factors Telenor ASA
Current Moody's 12-18 Month Forward View Telecommunications Service Providers Industry Scorecard [1][2] LTM 3/31/2021 As of 7/14/2021 [3] Factor 1 : Scale (12.5%) Measure Score Measure Score a) Revenue (USD Billion) $13.2 Baa 11.6-13 Ba Factor 2 : Business Profile (27.5%) a) Business Model, Competitive Environment and Technical Positioning Aa Aa Aa Aa b) Regulatory Environment Ba Ba Ba Ba c) Market Share A A A A Factor 3 : Profitability and Efficiency (10%) a) Revenue Trend and Margin Sustainability A A A A Factor 4 : Leverage and Coverage (35%) a) Debt / EBITDA 2.7x Baa 2.9x - 3.1x Ba b) RCF / Debt 18.5% B 16.8% - 17.3% B c) (EBITDA - CAPEX) / Interest Expense 7.5x Aa 6.9x - 7x Aa Factor 5 : Financial Policy (15%) a) Financial Policy A A A A Rating: a) Scorecard-Indicated Outcome Baa1 Baa1 b) Actual Rating Assigned A3
Government-Related Issuer Factor a) Baseline Credit Assessment baa1 b) Government Local Currency Rating Aaa c) Default Dependence Low d) Support Low e) Actual Rating Assigned A3
[1] All ratios are based on 'Adjusted' financial data and incorporate our Global Standard Adjustments for Non-Financial Corporations. [2] As of 12/31/2020. [3] This represents our forward view, not the view of the issuer, and reflects the disposal of Telenor Myanmar and the deconsolidation of Digi in Malaysia. Source: Moody's Investors Service
11 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Telenor's status as a Government-Related Issuer (GRI) Telenor qualifies as a GRI under our methodology because it is 54% government owned. Our A3 rating for the company reflects the combination of the following GRI inputs: a BCA of baa1, the Aaa (stable) local-currency rating of the Norwegian government, the low default dependence between Telenor and the government, and the likelihood that the government will provide a low level of support to the company if needed.
The low level of default dependence between Telenor and the government reflects the weak correlation between the company's credit profile and the economic trends in Norway, which is mainly a result of the group's strong liquidity and increasing market diversification. More specifically, our assessment that there is a low level of default dependence between Telenor and the government is based on the lack of financial and operational links between the two. Telecom operators generally have a fairly low level of correlation with the sovereign. In particular, direct and indirect fiscal transfers and government telecom spending represent a low proportion of Telenor's revenue. More generally, the company and the government are not exposed to the same revenue base and do not share the same credit risks as demonstrated by the fact that 79% of Telenor's revenue in 2020 was generated outside Norway.
Our assessment of a low level of government support available to Telenor in the event of stress is based on the following observations: there is no explicit support from the government, we are not aware of any formal verbal or written confirmation that the government will support the company in the event of a default on its financial debt and the company does not have any special legal status that would suggest a closer link with the state or an implicit form of support.
The government's 54% ownership of Telenor and its willingness to act as a rational shareholder suggest that the government would not be the sole provider of support in a stress scenario. Instead, the government would likely only consider providing support jointly with other shareholders in the form of a capital increase. The state's rationale for its ownership of Telenor is to maintain a leading technological and industrial company with head office functions in Norway.
The Norwegian government is noninterventionist, despite holding significant ownership stakes in several companies. In our view, it is unlikely that the government's solid reputation would be damaged in the event of default by Telenor. The company's economic and social importance in Norway has diminished over the recent years. This reduction is a result of the increasing presence of viable, privately owned competitors with significant market shares and the group's presence in emerging markets.
12 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Ratings
Exhibit 13 Category Moody's Rating TELENOR ASA Outlook Negative Senior Unsecured A3 Commercial Paper P-2 Source: Moody's Investors Service
13 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
Appendix
Exhibit 14 Moody's-adjusted debt reconciliation for Telenor ASA FYE FYE FYE FYE FYE LTM in NOK millions Dec-2016 Dec-2017 Dec-2018 Dec-2019 Dec-2020 Mar-2021 As Reported Debt 86,361.0 74,297.0 71,666.0 140,045.0 150,806.0 139,072.0 Non-Standard Public Adjustments 2,061.0 3,002.0 2,144.0 708.0 0.0 0.0 Pensions 2,585.0 2,565.0 2,819.0 2,386.0 2,747.0 2,747.0 Leases 13,978.3 15,132.9 14,955.1 0.0 0.0 0.0 Moody's-Adjusted Debt 104,985.3 94,996.9 91,584.1 143,139.0 153,553.0 141,819.0 All figures are calculated using our estimates and standard adjustments. Periods are financial year end unless indicated. LTM = Last 12 months. Source: Moody's Financial MetricsTM
Exhibit 15 Moody's-adjusted EBITDA reconciliation for Telenor ASA FYE FYE FYE FYE FYE LTM in NOK millions Dec-2016 Dec-2017 Dec-2018 Dec-2019 Dec-2020 Mar-2021 As Moody's-Reported EBITDA 42,459.0 42,659.0 39,926.0 50,103.0 58,675.0 61,164.0 Non-Standard Public Adjustments -1,517.0 -531.0 81.0 955.0 0.0 0.0 Unusual Items - Income Stmt 3,378.0 4,427.0 2,260.0 -652.0 -4,438.0 -7,825.0 Pensions 64.0 52.0 65.0 71.0 -14.0 -14.0 Leases 4,378.0 4,344.0 4,207.0 0.0 0.0 0.0 Moody's-Adjusted EBITDA 48,762.0 50,951.0 46,539.0 50,477.0 54,223.0 53,325.0 All figures are calculated using our estimates and standard adjustments. Periods are financial year end unless indicated. LTM = Last 12 months. Source: Moody's Financial MetricsTM
Exhibit 16 Peer comparison
Telenor ASA Swisscom AG Telia Company AB Elisa Corporation Axiata Group Berhad A3 Negative A2 Stable Baa1 Stable Baa2 Stable Baa2 Stable
FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM
Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 (in USD million) Revenue 12,926 13,090 13,207 11,526 11,835 12,105 9,098 9,718 9,993 2,064 2,162 2,226 5,935 5,764 5,808 EBITDA 5,740 5,779 5,833 4,412 4,654 4,808 3,348 3,743 3,802 739 790 812 2,639 2,563 2,640 Total Debt 16,289 17,934 16,614 11,035 11,013 10,456 12,021 12,365 11,816 1,445 1,757 1,701 6,302 6,845 6,544 Cash & Cash Equivalents 1,641 2,382 2,647 339 385 557 659 985 985 58 269 322 1,001 1,764 1,580 EBITDA margin % 44.4% 44.2% 44.2% 38.3% 39.3% 39.7% 36.8% 38.5% 38.0% 35.8% 36.5% 36.5% 44.5% 44.5% 45.4% (EBITDA - Capex) / Interest Expense 5.2x 7.4x 7.5x 12.7x 13.2x 13.3x 4.7x 5.0x 4.8x 17.7x 23.5x 26.1x 1.4x 2.5x 2.6x Debt / EBITDA 2.8x 2.8x 2.7x 2.4x 2.2x 2.2x 3.6x 3.0x 3.1x 1.9x 2.1x 2.1x 2.4x 2.6x 2.5x FCF / Debt -5.8% 2.6% 2.3% 3.5% 4.7% 5.4% 0.8% 1.9% 2.4% 1.6% 2.4% 1.5% -1.3% -0.2% -1.9% RCF / Debt 13.2% 18.3% 18.5% 26.2% 28.3% 27.2% 15.9% 19.1% 18.4% 22.2% 20.1% 20.3% 32.9% 30.3% 31.8%
All figures and ratios are calculated using our estimates and standard adjustments. FYE = Financial year end. LTM = Last 12 months. RUR* = Ratings under review, where UPG = for upgrade and DNG = for downgrade. Source: Moody's Financial MetricsTM
14 21 July 2021 Telenor ASA: Update following outlook change to negative MOODY'S INVESTORS SERVICE CORPORATES
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15 21 July 2021 Telenor ASA: Update following outlook change to negative